BR Analysis. Romanian government collects record-taxes from banks on higher interest income due to inflation-boosting policies

The Romanian government has collected record-taxes from the local major banks last year as they posted impressive profits on higher interest income, related to rising interest rates on loans in a moment when inflation peaked.

Societe Generale’s local subsidiary BRD – Groupe Societe Generale, the third bank in Romania in terms of assets, has registered a net profit of RON 1.55 billion (EUR 332 million) last year, up 12 percent compared with 2017, as net interest income rose by 16.5 percent.

Austria’s Erste Bank Group local subsidiary, BCR group, is the second largest bank in Romania in terms of assets and posted a net profit of RON 1.02 billion (EUR 218 million) in January-September, due mainly to the increase of 15.5 percent of its net interest income up to RON 1.5 billion.

Romanian private-owned Banca Transilvania, the biggest bank on the market in terms of assets, has registered a net profit of RON 1.24 billion in the first nine months of 2018, up 49.6 percent year-on-year, as its net interest income rose by 51.5 percent to RON 2.1 billion.

A recent BR Analysis showed that the 35 banks operating in Romania have registered in the first nine months of this year the highest profits in the last decade, as improved credit demand combined with low NPL rates have boosted earnings.

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But the key-factor of the record profits is a government year-long policy of boosting households’ demand through forcing wage increases, and the consequence was a surge in inflation last year.

The return on assets (ROA) key-index jumped by 29 percent in September 2018 compared with September 2017, to 1.76, the highest level since September 2008, according to central bank series consulted by Business Review.

According to the budget 2019 draft released by the Finance Ministry, the banks paid around RON 1.2 billion – a 9-year high – as tax on profit to the government – and this means higher profits means higher budget revenues.

Despite these numbers, the government has invented a “tax on greed” of 0.3 percent of assets due quarterly (this implies a 1.2 percent annual tax on assets) for the local banks accusing them of making too much profit in Romania and of being “greed”.

The new tax will take more than 5 billion from banks and will cut most of the profits of the financial institutions – and this means also lower taxes from profits, reversing part of the new budget revenues.

Profit from inflation

The impressive interest income growth rates registered in 2018, an argument used by the government in its “greed” story,  are mainly due to rising interest rates in the market this year as inflation reached 5-year highs in Romania of more than 5 percent last year, the highest level in the EU.

Higher inflation had an impact on Romania’s three-month money market rate (ROBOR), the main indicator that sets the interest rates for RON currency borrowers, which reached last year 4-year highs of almost 3.5 percent, compared with 2.05 percent at the end of 2017 or less than 1 percent in 2016.

But local banks have also benefited from low NPL rates after years of cleaning balance sheets through NPL sales or other methods.

In October 2018, the average NPL rate of the Romanian banking system declined to 5.4 percent, the lowest level since 2009, according to central bank data.

Cleaner balance sheets allowed local banks to grant new loans on higher demand from individuals and companies.

During the last few years, the government has adopted a strategy of wage-led growth, stimulating household consumption and GDP growth rates, but this model has generated larger fiscal and current account deficits – as well as higher inflation rates.

The economic theory says that interest rates are a mean of protection against inflation – which basically means the depreciation of money.